San Beda College Alabang

Ian Abalos, MBA

San Beda College
Alabang
June 25, 2014
Financial Markets
Stock Market
Bond Market
Money Market
Foreign Exchange Market
Derivatives Market
Commodity market
Others
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Financial Markets
A financial market is a mechanism that allows people to
trade (buy and sell) financial instruments (such as stocks
and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value at
low transaction costs and at prices that reflect efficient
markets.
Financial markets are the economys central nervous
system.
These markets promote economic efficiency:
They ensure resources are available to those who put
them to their best use.
They keep transactions costs low.
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
The Role of Financial Markets
1. Liquidity:
Ensure owners can buy and sell financial instruments
cheaply.
Keeps transactions costs low.
2. Information:
Pool and communication information about issuers of
financial instruments.
3. Risk sharing:
Provide individuals a place to buy and sell risk.
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Financial Markets Structure
Distinguish between markets where new financial
instruments are sold and where they are resold or
traded: primary or secondary markets.

Categorize by the way they trade: centralized
exchange or not.

Group based on the type of instrument they trade

Group by their primary purpose
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Where are financial securities traded?
The Primary market is the market where investors purchase newly
issued securities.
Primary market is closely associated with public offering:
Public offering is the offering of securities of a company or a similar
corporation to the public.
Initial Public Offering (IPO) is one type of public offering it
occurs when a company offers stock (not other securities) for sale
to the public for the first time.
Gray area side note: HSBC definition: An initial public offering (IPO)
is a company's first sale of stocks, bonds or certificates of deposit to
raise funds for the issuer.
The Secondary market is the market where investors trade
previously issued securities. An investor can trade:
Directly with other investors.
Indirectly through a broker who arranges transactions for others.
Directly with a dealer who buys and sells securities from
inventory.


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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
How are financial securities traded?
Exchange trading is done on regulated, organized and formalized
markets
Centralized exchanges - buyers and sellers meet in a central,
physical location.
Over the counter (OTC) trading is done on an informal (albeit
often well-organized) basis between buyers and sellers. Informal
trading can take place over a counter, by telephone or even
electronically via computer systems. Also known as off-exchange
trading.
Electronic Communication Network (ECN) - A computer system
that facilitates OTC as well as exchange trading. The ECN sends
buy or sell orders to the appropriate specialist on the floor of a stock
exchange, bypassing the floor broker. A company running an ECN
charges a fee for its services (ex., Tradebook by Bloomberg, Fxall
by Thomson Reuters, etc.)

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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Financial Markets Group by Primary Purpose
Financial markets facilitate:

The raising of capital (in the capital and money markets)
The transfer of risk (in the derivatives and commodity
markets)
International trade (in the foreign exchange markets)

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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Financial Markets - Categories
Stock Market a market where the shares of companies and related
instruments such as equity derivatives are traded publicly.
Bond Market comprises of long-term loans. A capital market through
which the instruments (called bonds) trade.
Money Market comprises of short-term loans and investments in
short term debt instruments. These instruments do not trade through an
exchange, but rather OTC (over-the-counter)
Foreign Exchange Market foreign currencies can be bought and
sold through this market. No formalized exchange exists and currencies
are traded on an OTC basis directly between authorized dealers.
Derivative Market a derivative instrument traded on a derivatives
market derives its value from an underlying instrument. This market
gives the investor the opportunity to hedge against the risk of dramatic
price fluctuations. Numerous instruments known as derivatives trade in
this market on an OTC basis. , except for futures and options which
trade on the exchange.
Commodity Market - refers to markets that trade in primary rather than
manufactured products. Soft commodities are agricultural products
such as wheat, coffee, cocoa and sugar. Hard commodities are mined,
such as (gold, rubber and oil).
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Stock Market
What are stocks?
A stock is a share in the ownership of a company. Stock
represents a claim on the companys assets and earnings.
As an owner (common shareholder), you are entitled to your
share of the companys earnings as well as any voting rights
attached to the stock.
Why do companies issue stock?
At some point every company needs to raise money.
Companies can either borrow it from somebody or raise it by
selling part of the company.
By issuing stock, the company does not have to pay back the
money or make interest payments.
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FEL109R - Treasury Management
San Beda College
Alabang
Common vs. Preferred Stocks
Common stock is the type most people purchase. It
represents ownership of a company and a claim on part
of the profits. Investors get one vote per stock.

Preferred stocks dont have the same voting rights, but
investors are usually guaranteed a fixed dividend. If the
company is liquidated, they are paid off first.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Stock Market Order Types
Order Type Buy Sell
Market order Buy at best price available for
immediate execution.

Value speed over price.
Buy at best price available for
immediate execution.

Value speed over price.
Limit order Buys at best price available
but not more than the preset
limit price. Forgo purchase if
limit is not met.
Sell at best price available, but
not less than the preset limit
price. Forego sale if limit is not
met.
Stop order Convert to a market order to
buy when the stock price
crosses the stop price from
below.
Convert to a market order to
sell when the stock price
crosses the stop price from
above. Also known as stop-
loss order.
Stop-limit order Convert to a limit order to buy
when the stock price crosses
the stop price from below.
Convert to a limit order to sell
when the stock price crosses
the stop price from above.
June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Bond Market
A bond is a debt investment in which an investor loans
money to an entity (corporate or governmental) that
borrows the funds for a defined period of time at a fixed
interest rate.
Bond basics:
Face Value/Par Value - is the amount of money a holder
will get back once a bond matures.
Par value is not the price of the bond.
Coupon - the amount the bondholder will receive as
interest payments.
Maturity - the maturity date is the date in the future on
which the investor's principal will be repaid.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Bond Rating
Bond Rating
Grade Risk
Moody's S&P/ Fitch
Aaa AAA Investment Highest Quality
Aa AA Investment High Quality
A A Investment Strong
Baa BBB Investment Medium Grade
Ba, B BB, B Junk Speculative
Caa/Ca/C CCC/CC/C Junk
Highly
Speculative
C D Junk In Default
June 25, 2014
The bond rating system helps investors determine a
company's credit risk.
Not all bonds are inherently safer than stocks.
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FEL109R - Treasury Management
San Beda College
Alabang
Money Markets
Money market is the financial market for short-term
borrowing and lending. It provides short term liquid
funding for the financial system.

Purpose of Money Markets
Investors in Money Market: Provides a place for
warehousing surplus funds for short periods of time
Borrowers from money market provide low-cost source
of temporary funds
Allows both to manage the timing of inflows and outflows
efficiently.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Money Market Instruments
Federal Funds
Treasury Bills
Commercial Paper
Repurchase Agreements
Negotiable Certificates of Deposit
Eurodollars
Bankers Acceptance
June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
What influences the money market?
Both the monetary and fiscal policy influences the money
market. Fiscal policy and monetary policy are the
macroeconomic tools that governments have at their
disposal to manage the economy.

Fiscal policy is the deliberate and thought out change in
government spending, government borrowing or taxes to
stimulate or slow down the economy.
Monetary policy, which describes policies concerning the
supply of money to the economy.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Foreign Exchange Market
The foreign exchange market is the market where one
buys or sells the currency of country A with the currency
of country B.
A currency exchange rate is simply the ratio of a unit of
currency of country A to a unit of the currency of country
B at the time of the buy or sell transaction.
FX market is the worlds biggest financial market.
June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Purpose of the FX Market
Currency conversion in the foreign exchange market is
necessary to complete private and commercial
transactions across borders.
A tourist needs to pay expenses on the road in local
currency.
A firm buys/sells goods and services in the other
countrys local currency.
Uses the foreign exchange market to invest excess
funds.
Is used to speculate on currency movements.




June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
How are currencies traded?
Done over the counter (OTC)
Spot exchange rates: the days rate offered by a
dealer/bank
Forward exchange rates: agreed in advance rates to
buy/sell a currency on a future date
Usually quoted 30, 90, 120 days in advance
The market is open 24 hours
Arbitrage is the process of buying low and selling high
given slightly different exchange rate quotes in one
location vs. another (e.g., London vs. Tokyo)
June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Derivatives Market
A derivative is a financial instrument whose value is
derived from the value of something else, usually called
the underlying(s).
Underlying: a barrel of oil, a financial asset, an interest
rate, the temperature at a specified location.
Various names: Derivative, derivative security, derivative
asset, derivative instrument, derivative product
Traders:
Hedgers
Speculators
Arbitrageurs



June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Derivatives
June 25, 2014
Example Underlying
Stock option, such as option on the
stock of Google
A stock, such as the stock of
Google
Stock index option, such as an
option on the S&P 500 index
A portfolio of stocks, such as the
portfolio of stocks comprising the
S&P 500 index
Treasury bill futures contract A Treasury bill
Foreign currency forward contract A foreign currency
Gold futures contract Gold
Futures option on gold A gold futures contract
Weather derivative Snowfall at a specified site
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FEL109R - Treasury Management
San Beda College
Alabang
Derivatives
Objective - derivatives are used to manage risk
exposures in interest rates, currencies, commodities,
equity markets, the weather.
OTC- and exchange-traded
Derivative instruments:
Forward contracts
Options
Futures contracts
Swaps
Derivatives are contracts, agreements between two
parties: a buyer and a seller.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Forwards
A forward contract is an agreement between two parties,
a buyer and a seller, to exchange an asset at a later date
for a price agreed to in advance, when the contract is
first entered into.
We call this price the delivery price.
Trades in the OTC market.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Futures
A futures contract is an agreement between two parties,
a buyer and a seller, to exchange an asset at a later date
for a price agreed to in advance, when the contract is
first entered into.
We call this price the futures price.
Trades on a futures exchange.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Options
An option gives the buyer the right, but not the
obligation, to buy/sell the underlying at a later date for a
price agreed to in advance, when the contract is first
entered into.
We call this price the strike/exercise price.
The option buyer pays the seller a sum of money called
the option price or premium.
Trades OTC or on an exchange.
Types of Options:
Call option: an option to buy the underlying at the strike
price
Put option: an option to sell the underlying at the strike
price

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
Commodity Market
A physical or virtual marketplace for trading raw or
prmary products.
Two types:
Hard commodities natural resources
Soft commodities agricultural produce

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Terminologies
The bid price:
The price dealers pay investors.
The price investors receive from dealers

The ask price:
The price dealers receive from investors.
The price investors pay dealers.

The difference between the bid and ask prices is called
the bid-ask spread, or simply spread.
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FEL109R - Treasury Management
San Beda College
Alabang
Terminologies
Short sell
Long buy
Ex., To do so there are different ways to trade currencies
when an investor goes long on an investment, it means that he
or she has bought a security believing its price will rise in the
future. Conversely, when an investor goes short, he or she is
anticipating a decrease in the securitys price.
The Bull a bull market is when the economy is doing well, the
GDP is growing and stock prices are rising. The bull market charges
ahead.

The Bear a bear market is when the economy is bad, recession is
looming and stock prices are falling. A bear market hibernates and
moves slowly.

June 25, 2014
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FEL109R - Treasury Management
San Beda College
Alabang
June 25, 2014
Web References
Florida Council Economic Education
http://www.stanlib.com
http://www.investopedia.com

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FEL109R - Treasury Management